Retained Earnings Solar Utility is a rapidly expanding supplier of energy in the southwestern US. The firm has 5,000,000 shares of common stock outstanding on which it recently paid a $3 dividend. The common stock is currently priced at $35 per share. The current earnings per share of $4 are expected to increase at an annual rate of 7% for the foreseeable future. Debt The firm also has two long-term bond issues outstanding. An issue of 100 million bearing a 12% interest rate has been outstanding for two years and the bonds are selling at face (par) value. A prior bond issue of 60 million will mature in the forthcoming period. The new 10-year bonds will have an annual coupon rate of 9% and are will sell for $900. After these new bonds are sold (issued), they will be the only remaining bonds since they will pay off both the 12% and 10% bonds. So, these new bonds will be the only bonds outstanding. Newly Issued Preferred Stock Solar plans to issue preferred stock as a financing source. They will sell shares for $100 par value preferred shares that pay an annual dividend of $6 on the preferred stock. The issue cost (float) of the preferred stock will be 3.5%. The firm expects to continue to provide capital financing in the following proportions in the future: long-term debt, 40%; preferred stock, 30%; and retained earnings, 30%. The firm is in a 34% tax bracket. Complete each of the following steps with the last step culminating in the calculation of the Weighted Average Cost of Capital (WACC). As you recall, WACC is the minimum return that the firm should strive to earn. Instructions: Students will complete each step that will culminate in the determination of this firms WACC. Show all your work and label each section: Step1, Step 2, etc Use either Word or Excel and upload your work to the Project Dropbox in D2L. Fill in the chart to calculate the weighted average cost of capital. I will be grading the chart, so be sure to fill in each section of the chart. When you have filled in the weighted costs in the last column, add these up to find the WACC. This project is as much about extraction of relevant information as it is about your ability to compute the WACC. You may need to review your notes and/or your HW. I do not mind if you work with one or two other classmates, but every student must submit their own project into the Project Dropbox. Please use the following as your step-by-step instructions: Step 1: What is the capital structure? (The percentages of debt, common stock, and preferred stock). You will have retained earnings and the issuance of preferred shares. Step 2: Calculate the cost of debt. Remember that you use the time value of money register on your calculator to value debt. Recall that we are interested only in the cost of NEW DEBT because our primary concern with the cost of capital is to use it for capital budgeting decisions. Dont forget to account for taxes. Step 3: Calculate the cost of preferred stock. This should be very easy. The only problem you should encounter is that dealing with the flotation cost. Step 4: Calculate the cost of retained earnings. Recall that there is no flotation cost associated with simply moving a number from the income statement to the statement of retained earnings, which is transferred to the balance sheet. It is important to remember that we are interested in the FUTURE EXPECTED DIVIDEND, not the just paid dividend. The case study gives you the just (or recently) paid dividend. You must calculate the future expected dividend. Use the Gordon Model to value the retained earnings. Step 5: Now that you have all of the costs and know the weights to assign to each, all you have to do is fill in chart

Security	Weights (%)	Costs	Weighted costs (Weights * Cost)
Retained Earnings
Preferred stock
Debt
		WACC=